What is Industry and Competitive Analysis ?

Introduction of Industry and Competitive Analysis

Several environmental factors influence organisations. It is up to managers to ensure that this influence used positively, leading to organisational success. For the firm to make a profit, it must create value for customers or buyers. Hence, the firm needs to understand its customers. While creating value, the firm has to obtain goods and services from suppliers.

So, it must value its suppliers and form enduring business relationships with them. While creating value for its hovers, the firm must closely look at the rivals who are there in the arena competing for the same 'space'. Hence, the firm must understand the competition. Thus, buyers, suppliers and competitors form the substance of a firm's industry environment.

Forces from the industry environment directly affect the firm, and the amount of influence the firm has over its industry is dependent on the dominance of its competitive position. Most strategic management books utilise Michael Porter's Five Forces Model as a framework for analysing the competitive forces within the industry. Like so many other models used to make strategic decisions today, the implicit assumption of this model is that the industry is operating within an economy closed to the greater society and ecosystem.

From the view of the Five Forces Model, industry analysis is traditionally portrayed in strategic management books from the rather static perspective of "what is" within the industry. This model suggests that strategic managers scan the product market segments in which they compete for opportunities and threats without much regard for context.

Their primary focus is on increasing market share within defined industry boundaries, and the competition is defined as those competitors who directly compete with them in individual product or service categories. Cooperative relationships are typically limited to those with direct suppliers and buyers. Capabilities to create value are viewed as residing in a single firm, and organisational performance is measured primarily in terms of how well the individual firm is managed concerning its economic sustainability.

Thus, within this traditional paradigm of industry analysis, strategic managers engage in adaptive learning within well-defined industry segments.

Components of Porter's Five Forces Model

Image Source - Google | Image by - https://read-to-lead-0.blogspot.com/

Dominant Economic Features

↪ Market Size and Growth Rate:- A company needs to have an overview of the industry market size. The market size of an industry is equal to the number of companies in a particular industry. Knowledge of industry growth rate helps in identifying the industry's position in its lifecycle, i.e., early development stage, rapid growth stage, early maturity stage, maturity stage, stagnation stage, decline stage.

↪ Number of Rivals:- Before making an entry, a company should identify the rivals I there may be numerous small rivalling companies or a small number of big business companies or a small number of big business houses. For example, the petrochemicals industry is dominated by Reliance and a few other larger players industry like the FMCG industry has many players - both big and small. It is also important to be aware of the current developments in the industry like mergers and acquisitions, strategic alliances.

↪ Scope of Competitive Rivalry:- The firm needs to know about the extent or scope of competition in its industry. For example, if product diversification is identified as a future then a new company in the industry should also a plan for future diversification. 

↪ Buyer Requirements and Needs:- A company needs to know about the needs and requirements of its customers. It also requires to keep a track of the changing patterns of buyer's needs so that it can acquire new customers and retain the existing ones. It can do this by doing systematic research on buyer behaviour and other market trends. 

↪ Degree of Product Differentiation:- The degree of differentiation in the industry will define the kind of pricing premium that a firm can charge its customers. In case the level of differentiation is low then the prices charged by the firms will also below. This will, in turn, raise the level of competition in the industry. It becomes very difficult for new players to compete based on price due to low-profit levels. 

↪ Product Innovation:- Product innovation is also an important dominant feature. There are industries where companies are characterised by short span of product life cycles and high product innovation levels. Research and Development is a very important function in these industries and industry participants should always try to create new and innovative products for maintaining their market position. For example, there is a very high rate of innovation in the smartphone industry. The typical lifecycle of a smartphone phone is very short as the buyers are on the lookout for new features all the time. 

↪ Rate of Technological Change:- Industries that are dependent on the rapid diffusion of new technologies are characterised by high investment in R&D on new technologies.  When a company enters an industry where the rate of change of technology is high it must direct its efforts in staying at par with the latest technological changes in the industry. Companies which don't adjust to the rapid change of technology lose their market share, e.g., Nokia. 

↪ Vertical Integration:- It is necessary to analyse the level of integration of the companies. Analysis of industry is largely affected by the horizontal and vertical in integration levels as both the level have their respective advantages and disadvantages. Apart from the integration activities competitive advantages and competencies of the rivals firms should also be analysed.

↪ Economies of Scale:- Companies also need to analyse and keep abreast of economies of scale in the industry may bring the cost down. They need to analyse the scale of operations of their competitors and see if a larger scale of economies brings about reduction in their cost structures. High economy scales lead to low production costs and high-profit returns.

Factors Analysed in Industry Analysis  

↬ Basic Features and Conditions of the Industry:- The most basic task is to analyse the general features and condition of the industry. 

 The basic feature of industry involves the size of the industry, the products and services offered by the companies, variants of the products and services, past performances of the industry, current industry position, future expectation, etc. 

↬ Industry Environment:- Another factor that must be studied in the industry analysis is the environment of the industry. The environment of an industry can be classified fragmented, emerging, matured, declining and global industries. 

↬ Industry Structure:- To analyse the industry in a better way, the structure of that particular industry should be understood. Every industry has a specific market size, a certain number of companies and each company has its own market share. 

 The firms in an industry compete with each other to capture the market. These characteristics determine the severity of competition in the industry, the extent of profitability and attractiveness of the industry.

↬ Industry Attractiveness:- Industry attractiveness is determined by factors like industry potential, industry growth, the profitability, future trends for the industry, the entry and exit barriers in the industry, etc. All these play a vital role in developing the attractiveness of an industry. 

↬ Industry Performance:- The determinants of an industry's performance are its annual production, profitability per year, technological advancements, etc. 

↬ Industry Practices:- The practices of an industry can be defined as the products or services in which the companies deal in, the type of markets they share, the business practices they carry-out, such as pricing, promotion, selling, research and development, etc. All of these factors affect the overall industry in significant ways.

↬ Emerging Trends:- The trends that are going to define the industry in future also impact the business practices indirectly Some of the important factors like product life cycle, industry life cycle, changes in needs and preferences of the consumers, changes in laws, possibilities of new entrants, innovation, changes in technology, etc., are some variables that have a significant impact on the industry.